Notional profit on closing stock valuation is taxable as business income, regardless of where the stock is physically kept.

Notional profit arising from the annual valuation of stock-in-trade was treated as business income under mercantile principles, because the surplus emerged only when closing stock was valued in the accounts and not from any actual sale at the place where the goods were stored. The legal situs of such profit was held to be the business and accounting process that brought the stock into computation, not the physical location of the stock itself. The argument based on Section 14(2)(c) and related provisions was rejected, and the appreciation in the Bikaner stock was held assessable to tax despite its physical location outside British India.

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Issues: Whether the notional profit representing the appreciation in value of stock-in-trade kept at Bikaner was assessable to tax, and whether such profit accrued or arose at Bikaner so as to escape assessment under the relevant provisions of the Indian Income-tax Act, 1922.

Analysis: The stock in question formed part of the assessee's stock-in-trade and was to be brought into the annual computation of profits on mercantile principles. The profit was not a realisable profit from a sale at Bikaner, but a notional surplus emerging only when the closing stock of the business was valued at the end of the accounting year. In such a case, the source and situs of the profit are the business and the valuation made in the course of preparing the accounts, not the physical place where some part of the stock happened to lie. The Court further held that the point based on Section 14(2)(c) and allied provisions did not assist the assessee, and the challenge to the reference could not succeed.

Conclusion: The notional profit on valuation of the Bikaner stock was taxable and was not exempt on the ground that the stock was physically outside British India. The question referred was answered in the affirmative, in favour of the Revenue.

Final Conclusion: The reference was disposed of by holding that the appreciation in the stock-in-trade was assessable as business profit arising from the annual valuation of the firm's stock, irrespective of the place where part of the stock was physically situated.

Ratio Decidendi: Notional profit arising from closing stock valuation accrues at the place where the business accounts are made up, and not at the place where the stock is physically located.

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