Unrealised appreciation in closing stock is not taxable income; accrual follows the place where business is carried on.

Closing stock is valued to ascertain true trading profit, and unrealised appreciation in unsold stock does not, by itself, create taxable income merely because it is marked at market value. The rise in value of silver held as closing stock was treated as notional and not separately chargeable as profit. The source and situs of accrual were held to be the place where the business was carried on, not the place where the stock was physically stored. Accordingly, the amount attributable to silver kept at Bikaner was not income accruing in an Indian State and did not qualify for exemption under section 14(2)(c).

---

---

Issues: (i) Whether unrealised appreciation in closing stock could be brought into taxable profits on valuation at market rate; (ii) whether the amount attributable to silver kept at Bikaner accrued or arose in an Indian State so as to be exempt under section 14(2)(c).

Issue (i): Whether unrealised appreciation in closing stock could be brought into taxable profits on valuation at market rate.

Analysis: The purpose of valuing unsold stock at the close of an accounting year is to complete the trading account and ascertain the true trading result of the year. Under accepted commercial accounting practice, closing stock is normally taken at cost or market value, whichever is lower, so that anticipated loss may be recognised, but anticipated profit in the form of an increase in value of unsold goods is not treated as realised. The valuation of closing stock is thus not the source of taxable profit, and appreciation in stock remaining unsold does not, by itself, create a taxable receipt.

Conclusion: Unrealised appreciation in closing stock could not be separately charged as taxable profit on the footing of notional gain.

Issue (ii): Whether the amount attributable to silver kept at Bikaner accrued or arose in an Indian State so as to be exempt under section 14(2)(c).

Analysis: The source of the profit was the business carried on at Calcutta, and the place where closing stock was physically located did not determine the situs of accrual. Since the silver bars remained part of the unsold stock of the Calcutta business and no business was carried on at Bikaner, the profit from the year's trading accrued or arose at Calcutta and not in the Indian State where the goods were stored. The exemption for income accruing or arising within an Indian State therefore did not apply.

Conclusion: The amount was not exempt under section 14(2)(c) and was assessable to tax.

Final Conclusion: The trading profit was chargeable in full at the place where the business was carried on, and the claimed exemption based on the location of stock in Bikaner failed.

Ratio Decidendi: Closing stock is valued only to ascertain true trading profits, and unrealised appreciation in stock-in-trade does not constitute taxable income merely because the stock is physically located outside the place of business; the situs of accrual is where the business is carried on.

---