Conversion of investment shares into stock-in-trade: profit computed using market value on conversion, not original purchase price.

Where shares originally held as investment are converted into stock-in-trade and later sold, the majority applied ordinary commercial principles and treated the market value on the date of conversion as the business cost for computing trading profit. It held that the original investment price was only historical and that the earlier rule against a person trading with himself did not govern this situation, because the issue was computation of actual trading profit, not taxation of a notional gain. The dissent considered the earlier anti-fiction principle applicable and would have used the original purchase price instead. The majority approach prevailed, favouring the assessee.

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Issues: Whether, where shares originally held as investment are converted into stock-in-trade and later sold, the assessable profit is to be computed by deducting the original purchase price or the market value prevailing on the date of conversion.

Analysis: The majority held that the later sale was a real trading transaction and that the profit had to be computed on ordinary commercial principles. For the business, the shares cost their market value on the date they were brought into the trading account, and the original investment cost was only historical. The rule against fictional sale or self-dealing in the earlier case involving withdrawal of stock from business did not control the present problem, because here the question was not whether notional profits could be taxed, but how actual trading profits should be computed. The majority also accepted that the market value approach gave the fair commercial measure of profit and rejected the suggestion that it involved any legal fiction of a notional sale.

Conclusion: The assessable profit was correctly computed by taking the market value on the date of conversion as the cost to the business, and the answer was in favour of the assessee.

Dissenting Opinion: Sarkar J. held that the earlier ruling against treating a person as trading with himself applied equally to this case, and that allowing market value on the date of conversion amounted to a prohibited fiction. He would have answered that the taxable profit was the difference between the sale price and the original purchase price.

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