Real income principle bars taxing notional profit on a bona fide stock transfer between separate entities.

Tax authorities cannot substitute market value for the actual consideration in a bona fide transfer of stock-in-trade between distinct legal entities merely because the arrangement reduces tax liability. Where the transfer is genuine, no sham or secret profit is shown, and no material establishes real income beyond the price actually received, taxation must be confined to real income and not notional or fictional profit. A taxpayer remains entitled to arrange commercial affairs to minimise tax within lawful limits, and principles applied to self-consumption or own-use transfers do not govern an actual sale between separate traders at an agreed price.

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Issues: Whether, in assessing profits, the revenue could disregard the actual price of a bona fide transfer of stock-in-trade to a subsidiary and substitute market value merely because the transaction reduced tax liability.

Analysis: The transfer between the assessee and its subsidiary was accepted as a bona fide transaction between two distinct legal entities, and no secret profit or sham was found. Tax can be levied only on real income actually earned; it cannot be imposed on notional or fictional income merely because the assessee could have arranged its affairs differently. An assessee is entitled to so arrange commercial affairs as to minimise tax burden, and a genuine transfer at a concessional price does not permit the taxing authority to substitute market value in the absence of material showing that real profits were earned. The authorities relied on by the revenue concerned self-consumption or transfer for own use and did not govern a transfer between separate traders at an actual price.

Conclusion: The revenue could not assess the difference between market value and actual transfer price as profit, and the answer to the surviving question was against the revenue.

Ratio Decidendi: In the absence of a sham transaction or material showing real profit, income-tax authorities cannot replace the actual consideration of a bona fide commercial transfer with a notional market value merely because the arrangement reduces tax liability.

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