P. M. Mohammad Meerakhan Vs.
Commissioner of Income-Tax, Ernakulam [1969] INSC 35 (12 February 1969)
12/02/1969 RAMASWAMI, V.
RAMASWAMI, V.
SHAH, J.C.
GROVER, A.N.
CITATION: 1969 AIR 1053 1969 SCR (3) 659 1969
SCC (2) 25
CITATOR INFO :
R 1974 SC1364 (6) RF 1986 SC1695 (34) RF 1991
SC1338 (16)
ACT:
Income-tax Act (11 of 1922)-Single
Transaction to purchase estate--No means to buy-Purchasers found-Plots sold and
one retained--whether transaction constituted trade-Value of plot retained
added for estimate profit, whether correct.
HEADNOTE:
The assessee entered into an agreement to
purchase a land for Rs. 6 lakhs. He paid Rs. 11,000/as advance and it was
agreed that the sale deed was to be executed by a specified date either in
favour of the assessee or his nominees. The assessee did not have resources to
buy land even worth a lakh nor could cultivate the land himself. He divided the
land into 23 plots and found purchasers for 22 of these plots. These 22 plots
were conveyed to the respective purchasers and the 23rd plot was conveyed to
the assessee.
The Income-tax authorities brought to tax the
sum representing the assessee's profit (after including the estimated value of
the plot retained by him). The assessee contended that (1) the transaction did
not constitute a venture in the nature of trade; and (ii) even if it did, the
profits from the adventure we’re not be properly ascertained as the adventure
would terminate after the plots retained by the assessee was also sold and
therefore the profits in the adventure could be determined only at the time of
the completion of the We of the plot. Repelling these contentions, this Court,
HELD : (i) The question whether a transaction
is an adventure in the nature of trade must be decided on a consideration of all
the relevant factors and circumstances which are proved in the particular case.
The answer to the question does not depend upon the application of any abstract
rule or principle or formula but must depend upon the total impression and
effect of all the relevant 'facts and circumstances established in the
particular case. [662 A] Having regard to the total effect of all the
circumstances in the present case the transactions of the assessee constituted
an adventure in the nature of trade and were in the course of the profit making
scheme and were taxable.
California Copper Syndicate v. Harris, [1904]
5 S.T.C. 159, 165-6, Martin v. Lowry, II Tax Cases. 297, Rutledge v. Commissioners"
of Inland Revenue, 14 Tax Cases 490, Commissioner of Inland Revenue v. Fraser,
24 Tax Cases 498, Leeming v. Jones, 15 Tax Cm" 333, Saroj Kumar Mazumdar
v. Commissioner of Income-tax, 37 I.T.R. 242, Venkataswami Naidu & Co. v.
Commissioner of Income-tax, 35 I.T.R. 594 and Raja J. Rameshwar Rao v.
Commissioner of Income-tax, Hyderabad, 42 I.T.R. 179, referred to.
(ii) The profit of the assessee was correctly
estimated by treating the land retained by him as stock-in-trade and valuing it
according to the normal accountancy practice.
Under the Income-tax Act for the purpose of assessment
each year is a self-contained unit and in the case of a trading adventure the
profits have to be computed in the manner provided by the statute. It is true
that the income-tax Act makes no express provision with regard to the value of
stock. It charges for payment of tax the 660 income, profits and gains which
have to be computed in the manner provided by the Income-tax Act. In the case
of a trading adventure the profits have to be calculated and adjusted in the
light of the provisions of the Income-tax Act permitting allowance prescribed
thereby. For that purpose it was the duty of the Income-tax Officer to find out
what, profits the business has made according to the true accountancy practice.
As a normal rule, the profit should be ascertained by valuing the
stock-in-trade at the beginning and at the end of the accounting year. [666
E-H; 668 D] Whimster & Co. v. Commissioner of Inland Revenue 12 Tax Cases
813, Commissioners of Inland Revenue V. Cock, Russell
Madras v. A. Krishnaswami Mudaliar &
Ors., 53 L.T.R. 122, referred to.
& CIVIL APPELLATE JURISDICTION : Civil
Appeal No. 1230 of 1967.
Appeal by special leave from the judgment and
order, dated October 10, 1966 of the Kerala High Court in Income-tax Referred
Case No. 18 of 1965.
S. T. Desai, Bhuvnesh Kumari, j. B.
DadachanJi and O. C. Mathur, for the appellant.
Sukumar Mitra, R. N. Sachthey and B. D.
Sharma, for the respondent.
The Judgment of the Court was delivered by
Ramaswami, J. In this case the appellant (hereinafter called the assessee) was
assessed for the assessment year 1956-57 on a total income of Rs. 8,400. The
Income Tax Officer later on came to know that the assessee's income from the
sale of estates had escaped assessment. The Income Tax Officer took action
under section 34(1) (a) of the Income Tax Act, 1922 (hereinafter called the
Act) for the assessment year 1956-57 on 13th August, 1959.
Under an agreement dated 18th May, 1955 a
company called Mundakayam Valley Rubber Co. Ltd. sold and delivered an estate
called Kuttikal Estate to one Mr. A. V. George. The area of the estate was 477
acres and 71 cents. Mr. A. V. George had entered into the agreement in his own
name and on behalf of another company called the Kailas Rubber Co. Ltd.
It was agreed that the vendor would execute
the necessary conveyance in favour of Mr. A. V. George or his nominees.
On 15th August. 1955. the assessee entered
into an agreement with Mr. A. V. George whereby the assessee agreed to purchase
477.71 acres forming part of Kuttikal Estate for Rs. 6 lakhs. An advance of Rs.
1 1,000 was paid by the assessee. The balance of Rs. 5,89,000 was to be paid by
the assessee on or before 25th September, 1955. It was agreed that Mr. A. V.
George should execute a sale-deed himself or cause it to be executed Kailas
Rubber Co. Ltd. on 661 whose behalf he was acting in favour of the assessee or
his nominees. The assessee subsequently divided the area of 477.71 acres into
23 plots and found purchasers for 22 of these, plots. The total extent of 22
plots for which he found purchasers was 373.58 acres and the total price paid
by the 22 purchasers was Rs. 5,18,500. A sale deed was executed by the
Mundakayam Valley Rubber Co. Ltd. on 31st March, 1956. It covered all the 23
plots. The 22 plots for which the assessee found purchasers were conveyed to
the respective purchasers and the 23rd plot was conveyed to the assesses
himself. Mr. A. V. George and the Kailas Rubber Co. Ltd. were parties to this
document. The plot which the assessee had retained for himself was 104.13 acres
in extent. Its value was estimated by the Income Tax Officer at Rs. 2,08,000.
The Income Tax Officer worked out the profit from the transaction of purchase
and sale of land as follows "Sale price of 373 acres Rs. 5,18,500 Value of
104 acres retained by the assessee at Rs. 2,000 per acre... Rs. 2,08,000
-----------------------Rs. 7,26,500 Less Cost Rs. 6,00,000
---------------------Rs. 1,26,500 The Income Tax Officer held that a sum of Rs.
1,25,000 in round figures represented the assessee's profit from an adventure
in the nature of trade and included this amount in his total income under
section 34(1)(a) of the Act. The assessee appealed to the Appellate Assistant
Commissioner who rejected the appeal. The assessee took the matter in further
appeal to the Appellate Tribunal which also rejected the appeal holding that
the amount of Rs. 1,25,000 represented profit from an adventure in the nature
of trade.
At the instance of the assessee the Appellate
Tribunal stated a case to the High Court on the following question of law
"Whether on the facts and in the circumstances of the case, the
transactions constituted a venture in the nature of trade and the surplus of
Rs. 1,25,000 was assessable to tax By its. judgment dated 10th October, 1966,
the High Court of Kerala answered the question in the affirmative and against
the assessee. This appeal is brought by special leave from the judgment of the
High Court of Kerala, dated 10th October, 1966 in Income Tax Reference No, 18
of 1965, 662 The question whether a transaction is an adventure in the nature
of trade must be decided on a consideration of all the relevant facts and
circumstances which are proved in the particular case. The answer to the
question does not depend upon the application of any abstract rifle or
principle or formula but must depend upon the total impression and effect of
all the relevant facts and circumstances established in the particular case.
In. California Copper Syndicate v. Harris,(1) Lord Justice Clerk, observed
"It is quite a well settled principle in dealing with questions of
assessment of income tax that where the owner of an ordinary investment chooses
to realise it, and obtains a greater price for it than he originally acquired
it at the enhanced price is not profit assessable to income tax. But it is
equally well established that enhanced values obtained from realisation or
conversion of securities may be so assessable where what is done is not merely
a realisation or change of investment, but an act done in what is truly the
carrying on, or carrying out, of a business. What is the line which separates
the two classes of cases may be difficult to define, and each case must be
considered according to its facts; the question to be determined being-Is the
sum of gain that has been made a mere enhancement of value by realising a
security or is it a gain made in the operation of business in carrying out a
scheme for profit making ?" But in judging the character of such
transactions several factors have been treated as significant in decided cases.
For instance, if a transaction related to the
business which is normally carried on by the assessee, though not directly a
part of it, an intention to launch upon an adventure in the nature of trade may
readily be inferred. A similar inference would arise where a commodity is
purchased and sub-divided, altered, treated or repaired and sold or is
converted into a different commodity and then sold. The magnitude of the
transaction of purchase, the nature of the commodity, the subsequent dealings
of the assessee, the nature of the Organisation employed by the assessee and
the manner of disposal may be such that, the transaction may be stamped with
the character of a trading nature. In Martin v. Lowry, (2) the assessee
purchased a large quantity of aeroplane linen and sold it in different lots,
and for the purpose of selling it started an advertising campaign, rented
offices engaged an advertising manager, a linen expert and a staff of clerks.
maintained account books normally used by a trader, and passed receipts add
payment (1) [1904] 5 S.T.C. 159,16-66.
(2) 11 Tax Cases 297.
663 in connection with the linen through a
separate banking account, It was held that the assessee carried on an adventure
in the nature of trade and so the profit was liable to be taxed. The same view
was taken in Rutledge v.
Commissioners of Inland Revenue(1) in regard
to an assessee who purchased very cheaply a vast quantity of toilet paper and
within a short time thereafter sold the whole consignment at a considerable
profit. Similarly, in Commissioner of Inland Revenue v. Fraser (2) the
assessee, a woodcutter, bought for resale, whisky in bond, in three 'lots. He
sold it later on at considerable profit. The assessee had never dealt in whisky
before, he had no special knowledge of the trade he did not take delivery of
the whisky nor did he have it blended and advertised. Even so it was held that
the transaction was an adventure in the nature of trade. Lord President Normand
observed in the course of the judgment :
"It is in general more easy to hold that
a single transaction entered into by an individual in the line of his own trade
(although not part and parcel of his ordinary business) is an adventure in the
nature of trade than to hold that a transaction entered into by an individual
outside the line of his own trade or occupation is an adventure in the nature
of trade. But what is a good deal more important is the nature of the
transaction with reference to the commodity dealt in. The individual who enters
into a purchase of an article or commodity may have in view the resale of it at
a profit, and yet it may be that is not the only purpose for which he purchased
the article of the commodity, nor the only purpose to which he might turn it if
favourable opportunity of sale does not occur.
In some of the cases the purchase of a
picture has been given as an illustration. An amateur may purchase a picture
with a view to its resale at a profit, and yet he may recognise at the time or
afterwards that the possession of the picture will give him aesthetic enjoyment
if he is unable ultimately, or at his chosen time, to realise it at a profit. A
man may purchase stocks and shares with a view to selling them at an early date
at a profit, but, if he does so, he is purchasing something which is itself an
investment, a potential source of revenue to him while he holds it. A man may
purchase land with a view to realising it at a profit, but it also may yield
him an income while he continues to hold it. If he continues to hold it, there
may be also a certain pride of possession But the purchaser of a large quantity
of a commodity like whisky, greatly in excess of what could be used by (1)
14Tax Cases490.
(2) 24 Tax Cases 498.
664 himself, his family and friends, a
commodity which yields no pride of possession, which cannot be turned to
account except by. a process of realisation, I can scarcely consider to be
other than an adventure in a transaction in the nature of a trade; and I can
find no single fact among those stated by the Commissioners which in any way
traverses that view. In my opinion, the fact that the transaction was not in
the way of business (whatever it was) of the respondent in no way alters the
character which almost necessarily belongs to a transaction like this".
These are cases of commercial commodities but
a transaction of purchase of land cannot be assumed without more to be an
adventure in the nature of trade. In Leeming v. Jones,(1) a syndicate was
formed to acquire an option over a rubber estate with a view to resell it at a
profit, and finding the estate too small the syndicate acquired another estate
and sold the two estates on profit. It was held that the transaction was not in
the nature of trade and the profit was not liable to be assessed to tax. The
same view was expressed in Saroj Kumar Mazumdar v. Commissioner of Income Tax
(2) in which the assessee who carried on business of engineering works
purchased land, which was under requisition by the Government, negotiated a
sale before the land was de-requisitioned and sold it after the land was
released. But the circumstances of a particular case may lead to the conclusion
that the purchaser resale of land is in the nature of trade. In Venkataswami
Naidu & Co. v.
Commissioner of Income Tax(3) the appellant
firm which acted as managing agents purchased, for a total consideration of Rs.
8,713, four contiguous plots of land adjacent to the place where the mills of
the company managed by it were situated. The first purchase was made in
October, 1941 and subsequent Purchases were made in November, 1941, June 1942
and November, 1942. As long as the appellant was in possession of the land it
made no effort to cultivate it or erect any superstructure on it but allowed
the land to remain unutilised except for the rent received from the house which
existed on one of the plots. The appellant sold the land to the company managed
by it in two lots in September and November, 1947, for a total consideration of
Rs. 52,600. The question was whether the sum of Rs. 43,887 being the excess
realised by the appellant by the two sales over its purchase price, was
assessable to income-tax. The Appellate Tribunal rejected the contention of the
appellant that the properties were bought as an investment and that the plots
were acquired for building tenements for the labourers or the mills but came to
the conclusion that the transaction was an adventure in the nature (1) 15 Tax
Cases 333.
(2) 37 1,T.R, 242, (3) 351.T.R. 594, 665 of
trade. On a reference the High Court expressed the same view. It was held by
this Court in appeal thatthe Appellate Tribunal was right in inferring that the
appellant knew that it would be able to sell the lands to the' 'managed company
whenever it thought it profitable, so to do, that the appellant purchased the
four plots of land with the sole intention of selling them to the mills at a
profit and that the High Court was right in holding that the transaction was an
adventure in the nature of trade. gain in Raja J. Rameshwar Rao v. Commissioner
of Income-tax Hyderabad,(1) the assessee purchased 217 acres of land from the
pattadars and on a portion of the land the assessee constructed a Ganj and
shops. The rest of the land he laid out as plots which he sold for a sum of Rs.
75,820. In computing the assessable income the Income Tax Officer added a sum
of Rs. 75,820 as receipt from business. The decision of the Income Tax Officer
was affirmed by the Appellate Commissioner and the Tribunal in appeal. The High
Court held on a reference by the, Appellate Tribunal that there was evidence
upon which, the Appellate Tribunal could have come to the conclusion that the
sum of Rs. 75,820 was the assessee's income from business. It was held by this
Court on appeal that when a person acquired land with a view to selling it
later after developing it, he, was carrying on an activity resulting in profit,
and the activity can only be described as a business venture. Where the person
goes further and divides the land into plots, develops the area to make it more
attractive and sells the land not as a single unit and as he bought it, but in
parcels, he is dealing with land as his stock-in-trade. The decision of the
High Court was accordingly affirmed and the appeal to this Court was dismissed.
As we have already said it is not possible to
evolve any single legal test or formula which can be applied in determining
whether a transaction is an adventure in the nature of trade or not. The answer
to the question must necessarily depend in each case on the total impression
and effect of all the relevant factors and circumstances proved therein and
which determine the character of the transaction. What. then are the material
facts found in the present case ? It is clear from the recital of the agreement
dated 15th October, 1955 that the intention of the assessee in purchasing the
estate was to resell it at a profit. An advance of Rs. 11,000 was paid by the
assessee on that date the balance of Rs. 5,89,000 was to be paid on or before
25th September, 1955. It was one of the terms of the agreement that Mr. A. V.
George was to execute the sale deed either in favour of the assessee or his
nominees. It was also found that the assessee did not have the resources to buy
any estate worth a lakh of rupees when he entered into the agreement for the
purchase of Kuttikal Estate for an amount of (1) 42 I.T.R. 179.
666 Rs. 6 lakhs. In the intervening period
between '15th August, 1955 and 31st March, 1956 the assessee divided the estate
into 23 plots and arranged for the sale of 22 plots to different purchasers.
The division of the land into 23 plots and the sale to the various purchasers
indicate that there was scheming and Organisation on the part of the assessee.
It was found that the assessee did not have the means and resources to
cultivate the land himself and that he had arranged for the sale of 22 plots to
different purchasers. Having regard to the total effect of all these
circumstances we are of the opinion that the High Court was right in its
conclusion that the transactions of the assessee constituted an adventure in
the nature of trade and were in the course of a profit making scheme and the,
question was rightly answered by the High Court against the assessee.
It was then contended on behalf of the
appellant that even assuming that there was an adventure in the nature of
trade,' the profits from such an adventure have not been properly ascertained
in the present case. It was said that the Income-tax authorities were wrong in
holding that the value of the 23rd plot retained by the assessee represented
the profit made in the transaction. The argument was that the adventure would
terminate after the portion retained by the appellant was also sold and
therefore the profits in the adventure could be determined only at the time of
the completion of the sale of the entire estate. In our opinion, there is no
justification for this argument. It is not a correct proposition to say that
the profits of the assessee cannot be ascertained even on the assumption that
the transaction of the adventure of trade was not completed.
Under the Income Tax Act for the purpose of
assessment each year is a self-contained unit and in the case of a trading
adventure the profits have to be computed in the manner provided by the
statute. It is true that the Income Tax Act makes no express provision with
regard to the value of stock. It charges for payment of tax the income profits
and gains which have to be computed in the manner provided by the Income Tax
Act. In the case of a trading adventure the profits have to be calculated and
adjusted in the light of the provisions of the Income Tax Act permitting
allowances prescribed thereby. For that purpose it was the duty of the Income
Tax Officer to find out what profit the business has made according to the true
accountancy practice. As a normal rule, the profit should be ascertained by
valuing the, stock-in-trade at the beginning and at the end of the accounting
year. In Whimster & Co. V. Commissioner of Inland Revenue(1) Lord President
Clyde observed at page 823 :
"In computing the balance of profits and
gains for the purposes of income-tax.... two general and fundamental common
places have already to be kept in mind.
(1) 12 Tax Cases 813.
667 In the first place, the profits of any
particular year or accounting period must be taken to consist of the difference
between the receipts from the trade or business during such year or accounting
period and the expenditure laid out to earn those receipt.
In the second place, the account of profit
and loss to be made up for the purpose of ascertaining that difference must be
framed consistently with the ordinary principles of commercial accounting, so
far as applicable, and in conformity with the rules of the income Tax Act, or
of that Act as modified by the provisions and schedules of the Acts regulating
excess profits duty, as the case may be.
For example, the ordinary principles of
commercial accounting require that in the profit, and loss account of a
merchant's or manufacturer's business the values of the stock-in-trade. at the
beginning and at the end of the period covered by the account should be entered
at cost or market price, whichever is the lower; although there is nothing
about this in the taxing statutes".
In Commissioners of Inland Revenue v. Cock,
Russell & Co. Ltd.(1) Croom-Johnson, J. in dealing with valuation of
stock-in-trade for purposes of taxation stated as follows:
"There is no word in the statutes or
rules which deals with this question of valuing stock-in-trade. There is
nothing in the relevant legislation which indicates that in computing the
profits and gains of a commercial concern the stock-in-trade at ' the start of
the accounting period should be taken in and that the amount of the
stock-in-trade at the, end of the period should also be taken in. It would be
fantastic not 'Lo do it : it would be utterly impossible accurately to assess
profits and gains merely on a statement of receipts and payments or on the
basis of turnover. It has long been recognised that the right method of
assessing profits and gains is to take into account the value of the
stock-in-trade at the beginning and the value of the stock-in-trade at the end
as two of the items in the computation. I need not cite authority for the
general proposition which is admitted at the Bar, that for the purposes of ascertaining
profits and gains the ordinary principles of commercial accounting should be
applied, so long as they do not conflict with any express provision of the
relevant statutes." In Commissioner of Income-tax, Madras v. A. Krishnaswami
Mudaliar and Ors. (2) it was observed by this Court that whichever method of
book keeping was adopted in the case of a trading (1) 29 Tax Cases 387 (2) 53
I.T.R. 122.
668 venture for computing the true profits of
the year the stock-in-trade must be taken into account. At page 132 of the
report Shah, J.
speaking for the Court stated the principle
as follows "These observations do not affect the true character of the
profit of a business.
Adjustments may have to be made in the
principle having regard to the special character of the assets the nature of
the business and the appropriate allowances permitted, in order to arrive at
the taxable profits. They do not support the proposition that, in the case of a
trading venture, you can arrive at the true profits of a year by ignoring
altogether the valuation of the stock-in-trade at the end of the year, while
debiting its value at the commencement of the year as an outgoing; for
determination of the profits by ignoring the valuation of the.
stock at the end of the year and debiting the
value of the assets at the commencement of the year would not give a true
picture of the profit for the year of account".
In view of this principle we are of the
opinion that the Income-tax authorities have correctly estimated the profit of the
assessee by treating the land as stock-in-trade and valuing it according to the
normal accountancy practice.
For the reasons expressed we hold that the
decision of the High Court of Kerala, dated 10th October, 1966, is correct and
this appeal must be dismissed with costs.
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