I.TA. NO.341/KB OF 1986-87, DECIDED ON 4TH MAY, 1991. VS I.TA. NO.341/KB OF 1986-87, DECIDED ON 4TH MAY, 1991.
1991 P T D 917
[Income-tax Appellate Tribunal, Pakistan]
Before Muhammad Mujibullah Siddiqui, Judicial Member and Iqbal M. Qureshi, Accountant Member
I.TA. No.341/KB of 1986-87, decided on 04/05/1991.
Income-tax Act (XI of 1922)--
----S. 15-BB---Where an assessee was engaged in taxable and non-taxable activities and the transaction of transfer of goods from one unit to another was made then it would be deemed that the different departments were separate entities for the purpose of taxation and doctrine of mutuality would not apply-- Assessee, in such circumstances, should have credited to its account to taxable unit the average market price of goods which it had transferred to its tax-free unit and not its cost price---Complexities and intricacies involved in taxation laws high-lighted.
Where a person is engaged in taxable anal non-taxable activities and the transaction of transfer of goods from one unit to another is made then it would be deemed that the different departments are separate entities for the purpose of taxation. Thus the doctrine of mutuality shall not apply in such circumstances.
The assessee should have credited to its account of taxable unit the average market price of goods, which it had transferred to its tax-free unit and not its cost price.
The taxation laws are special laws in their nature and purport, therefore the general concepts of law are to be applied in taxation matters with reference to the particular provisions of the taxation laws for the time being in force. The taxation laws have been aptly remarked as the most turbulent laws on the statute book. Some very simple concepts and propositions assume very complex and complicated position when examined in particular and special circumstances obtaining in the background of various tax provisions. Similarly, the proposition that no man can make profit out of himself and that no person can be buyer and seller at the same time, is generally accepted principle of trading and commerce but when the point is examined in the facts of the case where the assessee is engaged in two different activities, one taxable and other non-taxable and the income profits and gain of both the activities are to be determined separately, as income from taxable activity is to be subjected to the levy of tax, while income from non-taxable activity has to be allowed exemption, the proposition becomes very difficult rather confusing and puzzling.
Watson Bros. v. Hornby (1942) 24 T.C. 506; Sharkey v. Wernher (1956) 29 ITR 962 and Anil Starch Products Ltd. v. C.I.T. (1966) 59 ITR 514 fol.
C.I.T. v. Publix Industries PLD 1969 Kar. 606; C.I.T. v. Sir Romi Mehta (1955) 28 ITR 828; C.I.T. v. Mazagaon Dock Ltd.-(1955) 28 TTR 35 and Ram Chandra Munna Lal v. C.I.T. (1949) 17 ITR 394 distinguished.
C.I.T. Bombay City v. Sir Home Mehta ITR 28 (1955); C.I.T. v. Publix Industries Taxation 28 ITR 35 and C.I.T. v. Magzon Dock Ltd. (1955) 28 ITR 35 ref.
Ibrahim Siddat, CA. for Appellant.
Ilyas Shaikh, D.R. for Respondent.
Date of hearing: 2nd January, 1991.
ORDER
MUHAMMAD MUJIBULLAH SIDDIQUI (JUDICIAL MEMBER).- This appeal is directed against the order dated 17-6-1986 by the learned C.I.T.(A) Zone 4, Karachi in ITA No. C.I.T. (A)/Z-IV/918/1983-84.
2. Briefly stated the relevant facts giving rise to this appeal are that in the assessment year 1983-84 the appellant enjoyed income from:
(1) K's Poultry Feed.
(2) K's Poultry Appliances.
(3) K's Poultry Farm
(4) K & N's Agriculture & Poultry Breeding Farm.
3. Return of income was filed declaring income at Rs.2,73,007 in Part 1 of the return, and income of Rs.39,88,065 claimed to be exempt being income from poultry farm in Part II. During the course of proceedings the appellant revised original return of income. Income declared according to the original and revised return is as follows:
| NAME OF UNIT | INCOME DECLARED IN |
| (i) | Original Return | Revised Return |
| K's Poultry Feed | Rs.289,422 | Rs.275,398 |
| K's Poultry Appliances | (6,668) | (6,668) |
| K's Agricultural & Poultry Breeding Farm | 259,424 | (242,647) |
| K & N's Poultry Farm | Rs.37,23,611 | 42,31,516 |
| Interest income | 4,277 | 5,277 |
4. During the course of proceedings it further transpired that the appellant transferred 78,393 bags of poultry feed to poultry unit at cost, to wit, Rs.119.80 per bag, whereas the appellant sold such feed in open market at the average rate of Rs.134.39 per bag. The assessing officer formed view that in this way portion of income relating to poultry feed has been transferred to poultry farm unit, the income of which is exempt from tax. The appellant was confronted with these facts vide letter dated 24-1-1985 reproduced below:
..On perusal of your trading account in respect of poultry feeds it transpired that you have sold 2,94,446 bags of poultry feed during the whole year. Out of which 78,393 bags have been transferred to your own poultry farm at the cost of Rs.119.88 per bag. Whereas the remaining 1,16,053 bags have been sold in the open market at the average rate of 134.39 per bag. Your income from poultry farm is exempt, whereas the income from poultry feed is liable to income tax- by transferring the goods manufactured in a unit income of which is liable to tax you have transferred the income of a taxable unit to a unit, income of which is exempt.
I have gone through various case-laws and come to the conclusion that where an assesses carries on several distinct businesses, the profit of each business must be computed separately and allowances must be confined to the appropriate business, i.e., the allowance can be claimed computing the profit of only that business to which they relate, as has been held in South Indian Insurance Co. Ltd. v. C.I.T. and Ganeshilal Bhattanwala. Further in another case reported as Rahehandra Munnalal v. C,I.T., it has been held that where an assessee carries on different varieties of trade, commerce of manufacturing activities each variety will have to be regarded as separate business for the purposes of computing the income. I intend to include the difference of Rs.11,37,482 on 78,395 bags at the average rate of 14.51 per bag to the income of your poultry feed unit to which it actually relates.
5. The appellant furnished following explanation:
"2-A. You have stated in your letter that you intend to add a sum of Rs.11,37,482 to the returned income of our client being the difference between cost and sale value of feed bags consumed by poultry farm. You have worked out the amount of Rs.11,37,482 by multiplying Rs.78,393 bags consumed by poultry breeding farm with the average rate of Rs.14.51 per bag, which you feel is the margin between cost and sale value.
2.2. At the outset we would like you to appreciate the facts that the two limbs of the same business, i.e., poultry farm and poultry feed are being run and managed by the same proprietor. The self consumption of 78,393 feed bags by farm had to be accounted for at cost since the said consumption in a normal commercial parlance cannot be treated as sale as no transfer is taking place between two different persons who may be ordinarily called a buyer and a seller. It is an established principle of commercial law that it is practically and legally impossible for anyone to be simultaneously a buyer and seller in the same transaction. The doctrine of mutuality so often upheld and applied by superior Courts, that no man can make profit out of himself is squarely applicable in the present case. Since the assessee cannot be construed to have made profit out of his own feed business by including in purchases and sales with himself to the extent of the feed consumed by himself at his own farm. It is submitted that transaction entered into by commercial man must be looked into from a practically commercial point of view and in trying to determine whether a transaction can yield or result in a profit, the substance of the transaction must be taken into consideration and not its form whatsoever it may be. If we have to consider that the feed consumed by our client's farm constitutes a business transaction then it would means that our clients have made profit from himself, which we believe cannot be the proposition of law. It is to be appreciated that the two departments of the same owner's business, i.e., Poultry Farm and poultry feed, are being run and managed by one and the same person and it would be wholly unreal and artificial to separate two segments of the same owner's business from its owner and treat them as if they were separate entities trading with each other and by means of fictional sale introduce fictional profit which in truth and in fact is non-existent.
2.3. Yet from another standpoint it is submitted for your consideration that what is construed as "Business" is not a unilateral act. Business is brought about by a transaction between two or more persons and if there is an activity which is a business activity and that activity is carried on between two persons, then alone it can be said that each is carrying on business with the other. In the present case therefore, no business transaction is taking place between two parties since the feed produce has been consumed by the same person. There is no bar in law, that a person cannot consume or utilize for whatever purpose, any goods he is dealing in and any such self-consumption would not partake the nature of sale or buying and selling simply because one, limb of the business owned by the same sole proprietor is taxable while the other is tax-free. In fact the taxability or exemption does not determine whether a transaction fulfills the fundamental characteristics of sale, it is only to be taxed when a transaction made is deemed to be a sale and be liable to tax unless specifically excepted. Unless the following primarily elements are present in any transaction it is anything but sale.
(a) There should be two parties to a transaction to make a sale, a buyer and a seller.
(b) The sale should result in transferring ownerships from a seller to a buyer.
(c) The transaction should be accomplished on the ultimate transfer of title in the goods from one independent person usually a buyer and a seller; and
(d) there should be a physical delivery of goods from a person to a yet another person.
2.4. The pertinent fact to be appreciated is that the two limbs are being run and managed by one and the same person and, therefore, feed consumed by farm cannot mean and include a business transaction between farm and feed business. For to say so would mean that although the proprietors of the two departments are same he is said to have done business with himself and thereby made profit. This we reiterate can never be the proposition in law.
2.5. We further wish to state that business has been defined in section 2(11) of the Ordinance to mean and we quote.
"Business includes any trade, commerce or manufacture, or any adventure or concern in the nature of trade, commerce manufacture:"
There must be at least more than one party to a transaction in regard to any trade commerce, manufacture, or adventure or concern in the nature of trade before such trade, commerce or manufacture can yield or produce any profit chargeable under the Ordinance. Feed self-consumed would not be business within the meaning of the term business as defined in the Ordinance, because for any arrangement which can be termed as a business transaction there has to be naturally two parties. The operation of feed consumed by the farm run and managed by the same proprietor cannot constitute business and therefore cannot yield a profit chargeable under the Ordinance.
2.6. It is common knowledge that most of the poultry farms usually prepare their own feed out of the feed ingredients purchased from the market and the feed so produced is consumed by farm owned by such owners. If by consuming the feed produced by them, a 'Sale' is said to result in practical and commercial terms then the primary question arises, who the two parties in that transaction are? Obviously one, in the same premises if a department consumes it, no sale by any stretch of imagination could be said to occur.
2.7.Had self-consumption been capable of being treated as `sale' the income-tax law could have specifically made provision therefore in this context, reference to section 2(15) read with 3(6) of the Sales Tax Act would be found to be of great relevance wherein the intention of the legislature has been made so very categorical that "self-consumption" although not (sale) but for the limited purpose of Sales Tax Act is to be construed as such, because clause (d) of the said section 3(6) provided as under :
(d) When goods are manufactured not for sale but for the manufacturer own use.
2.8. Even talking of the income-tax law, section 15BB of the repealed Act is relevant where reference to a situation was envisaged in which a business concern may manage two units, one enjoying tax holiday and the other ' taxable. In order to preclude transaction between two units run by the same company wherein stock may be transferred at cost, proviso was added in section 158B of the repealed Act which we reproduce below:-
"Provided that the transfer of any raw materials, stock sand store from an existing industrial undertaking to newly set up industrial undertaking whose income profits and gain have been exempted under this subsection shall be at market rates and not at cost notwithstanding the fact that such newly set up industrial undertaking or such expansion of an existing industrial undertaking is branch or a subsidiary of the existing industrial undertaking."
According to the proposition laid down by you even if two concerns are being run and managed by the same (person) the transfer of stocks or its self-consumption would automatically be at market value. If we consider your proposition to be tenable in law we would like to submit that it would not have been necessary for the addition of the provision in section 15BB for transfer of stocks from taxable unit to non-taxable unit at market value and not at cost. The addition was made simply to make it legally obligatory for transfers at market value for in its absence it would have been at cost. It is a settled proposition in law that no man can make a profit out of himself, arid to state otherwise would not be legally and factually correct."
6. The assessing officer considered the explanation furnished by the appellant and observed as follows:
"In short the assessee in his letter noted above has contended:''
--self-consumption has no profit,--
--No transfer has taken place between two different persons.
--Application of doctrine of mutuality.
--Self-consumption would not partake the nature of sale, or buying and selling simply because one limb of two businesses owned by the same person is taxable while the other is exempt.
--Absence from Income Tax of (sic) of specific clause like
(a) Clause (d) to section 3(6) of Sales-tax Act, and
(b) Provisions of 15BB of the Repealed Act, 1922.
--The case-laws applicable in his case are:--
(i) C.I.T. Bombay City v. Sir Home Mehta ITR 28 (1955)
(ii) C.I.T. v. Publix Industries-Taxation 28 IT'R 35
(iii) C.I.T. v. Mazagaon Dock Ltd. (1955) 28 ITR 35.
(10) The contentions of the A/R of the assessee have no force in this c se as there are two separate and distinct units each of which has separate nature of income or expenditure and income of one unit is liable to tax while the income of other unit is exempt from tax.
What the assessee has done is that he has reduced the income of taxable unit i.e. poultry feed unit by Rs.11,35,482 and has transferred this profit to poultry farm and poultry farm breeding, whose income is exempt and has thus enhanced his exempted income by Rs.11,37,482. By employing this method the assessee has also avoided payment of Income tax on Rs.11,37,482 which is actually the income of taxable unit i.e. poultry feed unit. Had the assessee purchased the feed from open market he would have paid Rs.134/39 per bag which -is the market rate, thereby the profit of the exempted unit would have been less by the difference of amount of (Rs. 134.39 - Rs. 119) i.e. Rs.11,37,482.
It is therefore crystal clear that the assessee has only transferred the profit of a taxable unit to a non-taxable unit.
(11) The doctrine of mutuality as contended by the A/R of the assessee in his explanation in para reproduced above, is not applicable in this case. There are two separate units each having separate nature of business and independent source of income. One unit enjoys exemption from tax and the other unit is taxable and here it is the unit of poultry feed, the income of which is being determined for taxation purpose and by stretch of no law is exempt from tax to which the doctrine of mutuality is not applicable. '
(12) The contention of the counsel of the assessee with respect to non existence of specific provision like clause (d) of section 3(6) of Sales-tax Act and the proviso to section 15BB of repealed Income-tax Act in the Income-tax Ordinance, it may be stated that the existence. and non existence of specific provision like Sales-tax Act has no relevancy with the case. Sales tax Act is quite an independent Act and the provisions of the said Act cannot be applied in the Income Tax matter unless specific provision or reference is made to the same. Anyhow the existence and non-existence of the proviso to section 15BB of repealed Act has far reaching relevancy in the case. Section 15BB of repealed Act as it stood in the repealed Act itself does not find any place in the Income Tax Ord., 1979, but the existence of the same in the repealed Act much reflects the general scheme of the Act that the income liable to tax under the disguise of exempt income should not be allowed to go untaxed.
(13) The Income Tax Ordinance/Act has given a definite scheme to levy tax on the income, which is not specifically described as exempt in the Act/Ordinance. Thus the action of determining the accrued income of poultry feed unit is in conformity with the basic principle of Scheme of the Act/Ordinance. The receipt of income by a person not itself of a character to fall within the definition of exempt income specifically described in the Act/Ordinance cannot assume the character of exempted income by reason of the method by which it is calculated or determined. Thus the arguments advanced by the counsel of the assessee in this respect have no force.
(14) As regards the argument of the counsel with respect to non payment of tax by unit of poultry farm enjoying exemption from tax on poultry feed produced by them for their own consumption in their poultry farm have also no relevancy. The mere fact that a unit the income of which is liable to tax or unit the income of which is exempt from tax is owned by the same person does not alter the character of the income of each unit."
7. The assessing officer ultimately came to the following conclusion:
"Here in this case the position is that a single person is enjoying income from different varieties of trade, commerce, or manufacturing activities, each will be treated as a separate unit and profit of one unit cannot be determined in or transferred to other unit in any way.
Owing to the close connection between the two units (rather being managed by the same person in this case) the course of transaction, if so arranged that the taxable unit makes either no profit or makes less profit than the ordinary one reasonably expected in that unit, such an arrangement would deprive the department of tax which, would otherwise be payable by the taxable unit. In such cases the provisions of section 32 of I.T. Ord. are attracted and the taxable unit may be charged in respect of the profits which it has not in fact made but which it might reasonably be expected to have made had it done the business on ordinary commercial terms. The department has authority under section 32 of determining the quantum of notional profits in respect of which the taxable unit may be charged under the Act.
It is the income of the poultry unit, which has to be determined for taxation purposes and not of poultry farm unit. For income tax purpose it is irrelevant to consider whether or not the poultry farm unit, the income of which is exempt made any profit through such dealing with poultry feed units, what really matters is that how much profit the poultry feed unit earned though no profit might have occurred to the poultry farm unit.
What the assessee has done is this. He has transferred the manufactured goods, viz. 78,393 bags of poultry feed from its taxable unit namely poultry feed unit to its tax free unit namely (1) Poultry farm Unit (2) Agricultural and poultry breeding farm unit. This transfer has been done at cost of Rs.93,98,775 instead of the average market price of Rs.1,05,37,042. This way the assessee has transferred its taxable income amounting to Rs.11,38,266. (Rs.1,05,37,042 the average sale minus Rs.93,98,776 the cost price) to its non-taxable unit named above. This is out and out a case of transaction which is not bona fide transaction and is sham. The assessee should have credited to its account of taxable unit, the average market price of 78,393 bags of poultry feed which it has transferred to its tax free unit and not its cost price .of Rs.93,98,776. If any authority is needed in support of this view that is available in a case reported as Sharkee (Inspector of Taxes) v. Warner (HL) 1956-29-962 ITR. in the instance case, as it has been discussed above the sole intention of the assessee is to reduce its tax liability by transferring its taxable income to its tax free unit and this has deprived the Govt. exchequer of its rightful dues, which is not allowable under the law. It is therefore clear that the difference between average sale price and the cost price viz. Rs.11,38,266 is liable to tax."
8. Being aggrieved with the above treatment the appellant preferred first appeal reiterating the same contentions, without any success and hence this second appeal before us.
9. Heard Mr. Sidat Hyder, CA., learned Representative for the appellant and Mr. Ilyas Shaikh, learned Representative for the Department. Mr. Sidat Hyder has reiterated and canvassed the same points before us as agitated before the learned two officers below. The learned D.R. has also vehemently supported the impugned orders of the learned two officers below. Our findings are as follows:
FINDINGS
We have extensively cited from the assessment order with the purpose that a clear picture of the facts and circumstances of the case may emerge before us. Since there is no dispute about the facts, therefore, we need not repeat or discuss the facts while dealing with the issue under consideration. The main stress has been laid by Mr. Sidat Hyder before the two officers below and before us as well, on the doctrine of mutuality. He has submitted that the business of poultry farming and poultry feed are run and managed by the same proprietor and, therefore; the two units, one enjoying exemption from taxation and the other subject to levy of tax are the two limbs of the same business. According to Mr. Sidat Hyder the feed consumed by farm cannot mean and include the business transaction because nobody can be buyer and seller at the same time. He has submitted that since nobody can earn profit out of himself, therefore, there is no question of earning any income on self-consumption of feed by one department of the business which was produced by another department of the same business. On the other hand, the learned D.R. has strenuously supported the orders of the learned two officers below. He has contended that the goods have been transferred from taxable unit to exempt unit at cost rate instead of market rate and thereby incidence of tax on the taxable unit has been decreased which is not permissible in law. He has submitted that the law has granted exemption to the income derived by an assessee from the business of poultry farming. The appellant by the device of transferring goods produced by the poultry feed unit at cost price has attempted to avail exemption of income earned by taxable unit in the garb of self-consumption which is not permissible. The learned D.R. has submitted that although while interpreting taxation laws, the interpretation beneficial to an assessee is to be adopted but in case of exemptions, the law has to be construed strictly and exemption is to be allowed strictly to the extent granted in law. He has maintained that the exemption cannot be allowed to be extended by resort to a device which has the effect of enlarging the scope of exemption. He has further submitted that the doctrine of mutuality is not applicable to the cases where an assessee transfers goods or stock-in-trade from taxable unit to non taxable unit. He has submitted that by crediting cost price of 78,393 bags in the poultry feed account and debiting the same amount in the poultry farm account the appellants have themselves negatived their contention. If there is no sale transaction there is no question of debiting and crediting the two accounts representing the price of feed bags transferred from poultry feed account to poultry farm account. The learned D.R. has submitted that the only point for consideration is, as to what price is to be determined in respect of 78,393 feed bags transferred from poultry feed account to poultry farm account. He has submitted that the only reasonable price would be the market price and not the cost price as done by the appellant.
11. The learned representatives for the parties have cited some cases in support of their respective contentions but after going through the case-law relied upon by the parties we are constrained to observe that all the cases cited by the yearned representatives for the parties are wide off the mark. The learned representatives for the parties have cited following cases before us:
(i) C.I.T. v. Publix Industries PLD 1969 Kar. 606.
(ii) C.I.T. v. Sir Homi Mehta, (1955) 28 ITR 828, (Bom. H.C.)
(iii) C.I.T. v. Mazagaon Dock Ltd., (1955) 28 ITR 35 (Bom. H.C.)
(iv) Ram Chandra Munna Lal v. C.I.T. (1949) 17 ITR 394 (E. Punj. H.C.)
12. As already observed facts of the above cases are distinguishable from the facts of the present case, therefore, we need not dilate on the above rulings. We have been able to lay hand on three cases, two from English jurisdiction and one from Indian jurisdiction, involving the facts and circumstances which are on all fours to the facts and circumstances of the present case.
11. The learned representatives for the parties have cited some cases in support of their respective contentions but after going through the case-law relied upon by the parties we are constrained to observe that all the cases cited by the learned representatives for the parties are wide off the mark. The learned representatives for the parties have cited following cases before us:
(i) C.I.T. v. Publix Industries PLD 1969 Kar. 606.
(ii) C.I.T. v. Sir Homi Mehta, (1955) 28 ITR 828, (Bom.H.C.)
(iii) C.I.T. v. Mazagaon Dock Ltd., (1955) 28 ITR-35 (Bom. H.C.)
(iv) Ram Chandra Munna Lal v. C.I.T. (1949) 17 ITR 394 (E. Punj. H.C.)
12. As already observed facts of the above cases are distinguishable from the facts of the present case, therefore, we need not' dilate on ,the above rulings. We have been able to lay hand on three cases, two from English jurisdiction and one from Indian jurisdiction, involving the facts and circumstances which are on all fours to the facts and circumstances of the present case.
13. The first case is Watson Bros. v. Hornby, (1942) 24 Tax Cases 506. The facts of this case are that the assessee carried on the business of poultry breeding as well as hatchery which produced chicks primarily for sale as day-old chicks. Most of the chicks were sold but some of them were transferred to the brooder house and so became part of stock of birds on the farm. The sum for which the day-old chicks were sold by the assessee by auction in the open market was 4d. each. The assessee could have purchased day-old chicks in open market for their brooder houses at an average price of 4d. per chick over the same period. However, the cost of production of each saleable day old chick was 7d. The income from poultry farming was enjoying exemption from tax while the income from hatchery was subject to the levy of tax. The assessee claimed that in the circumstances of the case the sum to be credited to the hatchery business for day old chick transferred to the brooder houses should be at the rate of 4d. per chick. The Commissioners of Income-tax came to the conclusion that the hatchery must receive credit for those chicks at the cost of production namely 7d. per chick. The appeal was preferred before the High Court of Justice (Dings Bench Division). Macnaghten Judge, hearing the appeal formulated the question as follows:
"What is the price at which the chicks should be deemed to have been bought by the farm from the hatchery?"
The learned Judge observed that the assessees are the proprietors of both the hatchery and the farm and it is said that a person cannot trade with himself and further observed, "that, no doubt, is quite true; but for the present purpose it is, I think, necessary to regard the hatchery and the farm as separate entities."
14. During the course of arguments it was contended before the High Court on behalf of the assessee as follows:
(a) the hatchery being a factory operation as shown in the first stated case, stock could be credited at market price if the tax payer elected--the Revenue consistently allowed this;
(b) the market value was 4d. per chick as evidenced by auction prices actually obtained on part of the surplus chicks;
(c) the value of the farm was 4d. since the farm could obtain all the chicks it needed at 4d. by buying at auction and should not therefore, be debited at 7d;
(d) the difference of 3d. was a legitimate hatchery loss per chick;
(e) the credit of 4d. per chick in the accounts was correct.
15. It was contended on behalf of Revenue that:
(a) stock valuations do not enter into the question as there was no stock of chicks at the accounting dates;
(b) the hatchery and the farm are two activities of the same person who cannot trade with himself nor make a loss by transferring from one department to another;
(c) an allowance cannot be given for an unrealised loss;
(d) the credit of 4d. was, in effect, a writing off, of the unrealised loss of 3d. per chick which could only 'tic arrived at by treating the Appellants as trading with themselves, or by writing off a loss not actually incurred;
(e) the correct valuation per chick to credit to hatchery account was 7d., the admitted cost of production.
16. The learned Judge decided the issue in favour of assessee as follows:
"In this case the Commissioners have found that the day old-chicks could have been bought in the open market for the brooder houses at all average price of 4d. On that Finding I think that the Commissioners Were bound by law to find that for the purposes of the assessment of the profits of the hatchery, 4d. per chick should be allowed as the notional price to be paid for them:"
17. It is interesting to note that the plea taken by the appeal ant before us was taken by the Revenue before the High Court of Justice in the case cited above and the plea was not accepted. Since one of the units was enjoying exemption from tax and the other was subjected to levy of tax, therefore, it was held in the case cited above that the hatchery and farm were to be regarded its separate entities. Secondly, it was decided that a notional price is to be paid for the chicks transferred from the hatchery to the brooder house. Thirdly, it was decided that the notional price was to be taken at market price and not at the cost price.
18. The above judgment which was given in 1942 held the field for a number of years and the law propounded therein, remained unassailed till the point in issue again came for consideration in the case of Sharkey v. Wernher by the House of Lords (1956) 29 ITR 962. The relevant facts in this case were that the assessee carried on stud farm an activity which was admittedly taxable and also a separate activity racing stables which, enjoyed exemption from tax. At stud farm the assessee breeded horses for her racing stables and from time to time transferred horses from her stud farm to her stables. In the assessment year 1949-50 she transferred five horses from her stud farm to her stables. The cost of breeding these horses was debited in the stud farm account. The market value of these horses (if they had been sold) was considerably in excess of their cost. The Revenue, therefore, insisted that the market value of horses must have been debited in the stud farm account. It was contended before the House of Lords on behalf of Revenue that the ratio of decision in Watson Bros. v. Hornby (supra) that for the purpose of assessment of income tax the amount of market value was to be taken should be followed. It was further pleaded that in such cases the question was; on what basis must be notional figure (for it must be notional) be determined the market value or the cost of production? The purpose is to enable the balance of profits and gains to be arrived at. If one takes the basis of market value the result is more in accordance with reality than otherwise would be the case. In relation to tax the line must be drawn when the horses are withdrawn from the stud farm, the taxable activity. On that basis the only way in which one can get anything like an accurate result is to take market value figure. It was further pleaded on behalf of the Revenue that when an assessee is dealing in taxable and non-taxable activity then whenever the owner takes over or gives away what was trading cost, at the moment of disposal it must be treated us if sold in the course of trade and, therefore, a receipt equivalent to market value must be credited. It was further maintained that there was a split in assessee's activities in stud farming and racing respectively so that she was dealing with herself in two different capacities and, therefore, the object and end of the calculation was to discover the balance of profit and gains of the assessee's activities, which were subjected to levy of tax. Thus there was an inevitable dichotomy in such a situation.
19. On the other hand, it was contended on behalf of the assessee that the tax is imposed on the actual profit in fact arising from the trade. It was maintained that the horses which were moved from the stud farm to racing farm were not sold or disposed of by way of trade and, therefore, no profit arose or accrued by reason of that removal. It was also urged that one must not impute to the tax-payer profits which he might have made but has not in fact made. It was further maintained that there must be two parties if there is to be a sale, and until goods were sold no profit arises. One does not make or earn profits merely by producing an article. If a man eats grapes which he has grown himself he does not make profit. He is not to be taken to have been dealing with himself in another capacity and eating his grapes at the full market value. No income tax significance can be attached to a trader taking stock out of his trade for his personal use. A man cannot trade with himself by making a profit himself in any circumstances. It was further contended that a sum equal to the cost of production of the horses was to be credited as the equivalent of his expenditure which in the event turned out not to have been for the purpose of trade, as they were not disposed of in the way of trade. The figure in trade is only a cancellation of that cost, since, the horses have not been withdrawn from the trade there must be written out of the accounts the whole cost bona fide, though mistakenly, entered in respect of them. It was pleaded that the case Watson Bros. v. Hornby was wrongly decided as decision in that case was based on an artificial and inadmissible law. After considering the respective contentions of the parties his Lordship Viscount Simonds formulated the point in consideration as follows:
"The problem, therefore, in all its simplicity, is whether a person, carrying on the trade of farming or, I suppose, any other trade, who disposes of part of his stock in trade not by way of sale in the course of trade but for his own use, enjoyment, or recreation, must bring into his trading account for income-tax purposes the market value of that stock in trade at the time of such disposition."
20. While appreciating the decision in the case of Watson Bros. v. Hornby, it was observed by his Lordship as follows:
"It is convenient at this stage to refer to the case of Watson Bros. v. Hornby, which I have already mentioned. In that case the tax-payers, who were the appellants in the appeal, carried on a business of poultry dealers and breeders of poultry at a hatchery belonging to them, which was conceded to be an enterprise chargeable as a trade under Case 1 of Schedule D of the Income Tax Act, 1918. The business of the hatchery was to produce and sell day-old chicks. They also carried on farming activities, which were conceded to be, for income-tax purposes, a separate enterprise from the hatchery business and, as the law then stood, were an income-tax source chargeable under Schedule B of the Income Tax Act, 1918. Most of the produce of the hatchery was sold, but a substantial number of day-old chicks were from time to time transferred to the farm and became part of the stock of poultry of the farm. The question in the appeal was whether, in computing the profits of the hatchery business, the day-old chicks transferred to the farm should be bought in at cost or market value. The market value was at the material time much below cost, viz., 4d. as against 7d. per chick. It was contended for the tax payers that market price and for the Crown that cost of production should be adopted as the appropriate figure in the accounts. It was decided by Macanaghten, J. that the tax-payers' contention was right, and they were accordingly chargeable upon the footing that as traders in respect of their hatchery business they received 4d. only per chick. This decision, which your Lordships were told has ever since been adopted as the basis of assessment by the Revenue in similar cases, involves two things, first, that the tax-payer may in certain cases be subject to a sort of dichotomy for income tax purposes and be regarded as selling to himself in one capacity what he has produced in another, and, secondly, that he is regarded as- selling what he sells at market price. It is a decision upon which the appellant relies in the present case, and which, as I have said, Vaisey J. regarded as an authority binding him. The learned Judge also derived some assistance from Inland Revenue Commissioner v. William Ransom & Sons Ltd., in which it was at least recognized that for tax purposes two part of an enterprise carried on by a tax-payer should be treated as distinct. But it was not, I think, an issue in that case at what price goods should be deemed to be transferred from one part of the enterprise to the other.
21. His Lordship Viscount Simonds ultimately concluded as follows:
"My Lords, how far is this principle, which is implicit in the judgments that I have cited and in the admission upon which this case has proceeded, supportable in law? That it conflicts with the proposition taken in its broadest sense, that a man cannot trade with himself is, I think, obvious. Yet it seems to me that it is a necessary qualification of the broad proposition. For, if there are commodities which are the subject of a man's trade but may also be the subject of his use and enjoyment, I do not know how his account as a trader can properly be made up so as to ascertain his annual profits and gains unless his trading account is created with a receipt in respect of those goods which he has diverted to his own use and enjoyment. I think, therefore, that the admission was rightly made that sum must be brought into the stud farm account as a receipt though nothing was received and so far at least the tax-payer must be regarded as having traded with himself. But still the question remains, what is that sum to be? I suppose that in the generality of cases in which the question arises in a farming or any other business, e.g., where the farmer supplies his own house with milk, or a market gardner with vegetables, an arbitrary or conventional sum is agreed. The house was not given any information as to the prevailing practice. Now the question precisely arises. In answering it I am not influenced by the fact that a change in the law has made the farmer liable to tax under Schedule D instead of under Schedule B, nor does section 10 of the Finance Act, 1941, affect my mind beyond the fact that it emphasized the artificial dichotomy which the scheme of income-tax law in many instances imposes. But it appears to me that, when it has been admitted or determined that an article forms part of the stock in trade of the trader and that upon his parting with it so that it no longer forms part of his stock in trade some sum must appear in his trading account as having been received in respect of it, the only logical way to treat it is to regard it as having been disposed of by way of trade. If so, I see no reason for ascribing to it any other sum than that which he would normally have received for it in due course of trade, that is to say, the market value. As I have already indicated, there seems to me to be no justification for the only alternative that has been suggested, namely, the cost of production. The unreality of this alternative would be plain to the tax-payer, if, as well might happen, a very large service fee had been paid so that the cost of production was high and the market value did not equal it."
22. One of the five Law Lords namely Lord Oaksey did not agree with the conclusions arrived at by his Lordship Viscount Simonds, and held that there must be at least two parties, one supplying the goods and the other to whom it should be supplied and who should pay for it. If these two parties are identical, there can be no trading. No man can trade with himself.
23. However, Lord Porter agreed with the view of Lord Viscount Simonds and with the separate opinion recorded by Lord Radcliff in support of the view held by Lord Viscount Simonds. Lord Radcliff examine the issue at great length and after giving full resume of the case-law for and against concluded as follows:
"My Lord, with these considerations in mind, I must now say what I believe to be the right way to deal with the present case. When a horse is transferred from the stud farm to the owner's personal account there is a disposition of trading stock. I do not say that the disposition is made by way of trade, for that is a play on words which may beg the question. At least three methods have been suggested for recording the result in the stud farm's trading accounts. There might be others. Your Lordship must choose between them. First, there might be no entry of a receipt at all. This method has behind it the logic that nothing in fact is received in consideration of the transfer, and there is no general principle of taxation that assesses a person on the basis of business profits that he might have made but has not chosen to make. Theoretically, a trader can destroy or let waste or give away his stock. I do not notice that he does so in practice, except in special situations that we need not consider. On the other hand, it was not argued before us by the respondent that this method would be the right one to apply and a tax system which allows business losses to be set off against texable income from other sources is in my opinion bound to reject such a method because of the absurd anomalies that it would produce as between one tax-payer and another. It would give the self-supplier a quite unfair tax advantage.
Secondly, the figure brought in as a receipt might be cost. That is what the respondent contends for. It is not altogether clear what is to be the basis of such an entry. No sale in the legal sense has taker'nor has there been any actual receipt: the cost basis, therefore, treats the matter as though there had been some sort of deal between the tax-payer and himself but maintains that in principle he can only break even on such a deal. I do not understand why, if he can be supposed to deal at all, he must necessarily deal on such self-denying terms. But then the respondent argues that the cost figure entered as a receipt is to be understood as a mere cancellation of the cost incurred to date. The item of stock transferred to the owner's private account is shown by that very event to have been "withdrawn" from the trade and the only practical course is to write out of the trader's accounts the whole of the cost bona fide, but mistakenly, entered in respect of it. I think this is a very attractive argument, but its weakness is that it does not explain why such cancellation should take place. This is not put to us as a case in which, there being no market, cost is the best available estimate of value. The fact that an item of stock is disposed of not by way of sale does not mean that it was any the less part of the trading stock at the moment of disposal. On the contrary, it was part of the stock of the venture at every moment uptill then and whatever was spent upon it was rightly entered as a part of the costs and expenses of the trade. Its disposal does not alter that situation. The trade of which the receipts and expenses are in question is the whole activity of farming and the disposal of the produce is only one, though a very important, incident of that activity. I think it a fallacy, therefore, to suppose that the method of disposal can give any warrant for treating costs hitherto properly charged to the trade as if, ex post facto, they never ought to have been charged at all. Yet, if a cancelling entry is not to be made, there must either be a figure entered as a receipt which, admittedly, does not represent any actual legal transaction, or the costs incurred up to the date of disposal must remain on the book to create or contribute to a "loss" of income which common sense suggests to be a fiction.
In a situation inhere everything is to some extent fictitious, I think that we should prefer the third alternative of entering as a receipt a figure equivalent to the current realizable value of the stock item transferred. In other words, I think that the case of Watson Bros. v. Hornby was rightly decided and that its principle is applicable to all those cases in which the income-tax system requires that part of a tax-payer's activities should be isolated and treated as a self-contained trade. The realizable value figure is neither more nor less "real" than the cost figure, and in my opinion it is to be preferred, for two reasons. First, it gives a fairer measure of assessable trading profit as between one tax-payer and another, for it eliminates variations which are due to no other cause than any one tax-payer's decision as to what proportion of his total product he will supply to himself. A formula which achieves this makes for a more equitable distribution of the burden of tax, and is to be preferred on that account. Secondly, it seems to me better economics to credit the trading owner with the current realizable value of any stock which he has chosen to dispose of without commercial disposal than to credit him with an amount equivalent to the accumulated expenses in respect of that stock. In that sense, the trader's choice is itself the receipt, in that he appropriates value to himself or his donee direct instead of adopting the alternative method of a commercial sale and subsequent appropriation of the proceeds."
24. Lord Tucker also agreed with the opinion of Lord Radcliffe. Thus, with the majority opinion of 4 to 1 the decision in the case of Watson Bros. v. Hornby was approved.
25. The third case in which the identical issue has been examined is from Indian jurisdiction (Anil Starch Products Ltd. v. C.I.T.), (1966) 59 I T R 514. Briefly stated the relevant facts were that the assessee company was originally formed for the purpose of manufacture and sale of industrial starch. Subsequently, the assessee company set up another plant for producing dextrose, a pharmaceutical product, of which starch was the raw material. The assessee claimed exemption in respect of the profits derived by it from its new industrial undertaking. The Tribunal held that the assessee was entitled to the exemption in computing the profits for purposes of the exemption, starch supplied by the old industrial undertaking should be valued at the market price and not at its cost of production. In this case the issue was examined in a different perspective. The A.A.C. remarked in his order as follows:
"This is not a question. of selling goods to oneself at a profit. It is a question of allocating the final profit to the various processes involved in obtaining the final product. If some of these processes are old and only a few new, i.e., those which satisfied the requirements of section 15-C, there could be no justification for claiming that the profit attributable to the old processes should also be exempt under section 15-C.
The Tribunal formulated the following question:
"In our opinion the real point which we have to consider, as we have already mentioned, is wider, as in the present case, the same assessee is carrying on two different trading activities, how are the profits of each trading activity to be separately determined?
The Tribunal finally concluded as under:
"We think having regard to the position obtaining in this case, the profits of the new industrial undertaking could only and correctly be computed on the basis of the market value of the starch used by it as a raw material and the profit of the old industrial undertaking could also be. computed only on the basis of the transfer of the starch being made to the new industrial undertaking at the market price even though shown in the accounts at actual cost. We need hardly repeat that this is so because profits undoubtedly are required to be computed separately in respect of the two activities."
25-A. It will be seen that in this case also the facts were identical as before us inasmuch as the old industrial undertaking producing industrial starch was engaged in taxable activity while the new industrial undertaking using industrial starch was enjoying exemption from tax. In these circumstances the following question was referred to the Gujrat High Court:
"Whether on the facts and circumstances of the case, the starch produced by the old industrial undertaking and used as raw material in the production of dextrose by the new industrial undertaking should be taken at cost or market price for the purpose of computing profits and gains of the new industrial undertaking as exempt under section 15-C of the Indian Income-tax Act, 1922?"
26. It was contended before the High Court on behalf of the assessee that the assessee-company was entitled to value the starch at its own cost and that there was no provision in the Act which could compel the assessee-company to debit the new industrial undertaking at the market price realizable at the time of its user for the production of ultimate product, dextrose. The Hon'ble Judges of Gujrat High Court examined the contention in the light of various cases from Indian jurisdiction as well as the cases of Watson Bros. v. Hornby and Sharkey v. Wernher referred to by us earlier and finally came to the following conclusion:
"The question before us, however, is not what value of the raw materials the assessee might enter in his accounts, but how profits are to be computed. Considering the authorities referred to above, the principle that really emerges from them is that computation of profits must be done on commercial basis, that is to say, what is the cost to the new undertaking where a business asset or stock-in-trade has been transferred inter-departmentally. As Lord Radcliffe in Sharkey's case and the Supreme Court in Shirinbai Kooka's case have observed, the realistic way of doing so would be to enter the actual cost that the new undertaking has borne, i.e., the price which was realizable at the time when the transfer of such business asset took place from one department or from one trading activity to another. In computing the profits, as provided by section 15-C, whatever may have been done by the assessee so far as his books of accounts are concerned, the revenue would still be entitled to enquire, where exemption under this section is sought for, whether the profits shown by the assessee in his books are realistic or not, and that can only be ascertained by acting on commercial principles, that is, by computing the profits, on the basis of the realistic value of the business asset transferred from one activity to another.
What then is the factual position in the instant case? The starch which is manufactured by one department of the company's manufacturing unit and which the assessee-company also sells as profit has been transferred to its another department for being used as raw material in the manufacture of dextrose which is the ultimate product. Dextrose is actually sold by the assessee-company and that is an actual commercial activity, as was the case in Commissioner of Income-tax v. Shirinbai Kooka. The question is, in computing the profits of the new industrial undertaking, which, for the purpose of section 15-C, is to be treated as an independent and a distinct undertaking; that is to be the basis of the value of the raw materials, cost price to the company as canvassed by Mr. Kaji, or their value currently realisable at the time when they were diverted? When starch was produced, it would form the stock-in-trade of the assessee-company. When that is removed for use in another undertaking of the same assessee-company, what value is to be credited there, for some has to be credited in the accounts of the old undertaking and debited in the accounts of the new undertaking. The alternatives suggested are (1) the cost and (2) the market value. The making of the credit entry in the one and debit entry in the other would not constitute a notional or a fictional trading by the assessee-company with self. The question of the computation does not involve that principle, but it involves the principle of true accounting and computation. By crediting only the cost, the assessee-company would not be representing the correct and the true picture in the accounts of its starch manufacturing business, and by debiting the cost only in the account of dextrose it would also not be giving a correct picture of the true profits made on the sale of dextrose. In both the cases the accounts would not be realistic. The correct method of computation, therefore, is the one laid down in C.I.T. v. Shirinbai Kooka, where the Supreme Court has approvingly cited the observations of Lord Radcliffe in Sharkey's case, Our answer to question No.l, therefore, is that the starch produced by the old industrial undertaking and used as raw material in the production of dextrose in the new industrial undertaking should be taken at the market price for the purpose of computing profits and gains of the new industrial undertaking for the purpose of section 15-C of the Act.
27. We have carefully examined the various aspects considered in the above three cases from the English and Indian jurisdiction. We have not been able to lay hand on any case from Pakistan jurisdiction on this issue. In view of the reasonings given in the above three cases it is held that the learned two officers below have rightly concluded that the assessee appellant should have credited to its account of taxable unit the average market price of 78,395 bags of poultry feed which it had transferred to its tax-free unit and not its cost price. We are further persuaded to agree with the submission of learned D.R. that the taxation laws are special laws in their nature and purport, therefore, the general concepts of law are to be applied in taxation matters with reference to the particular provisions of the taxation laws for the time being in force. The taxation laws have been aptly s remarked as the most turbulent laws on the statute book. Some very simple concepts and propositions assume very complex and complicated position when examined in particular and special circumstances obtaining in the background of various tax provisions. Similarly, the proposition canvassed by Mr. Sidat Hyder before us that no man can make profit out of himself and that no person can be buyer and seller at the same time, is generally accepted principle of trading and commerce but when the point is examined in the facts of the present case where the assessee is engaged in two different activities, one taxable and the other non taxable and the income profits and gain of both the activities are to be determined separately, as income from taxable activity is to be subjected to the levy of tax, while income from non-taxable activity has to be allowed exemption, the proposition becomes very difficult rather confusing and puzzling. We have already seen that the issue has been laid to rest in England with the decision of House of Lords in Sharkey's case whereby a principle has been accepted that where a person is engaged in taxable and non-taxable activities and, the transaction of transfer of goods from one unit to another is made then it would be deemed that the different departments are separate entities for the purpose of taxation. Thus the doctrine of mutuality shall not apply in such circumstances. We respectfully agree with this proposition and consequently confirm the view held by the learned two officers below.
28. Consequent to above findings the appeal is held to be devoid of force and stands dismissed accordingly.
M.BA./1198/TAppeal dismissed.