Full Judgment Text
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PETITIONER:
P. M. MOHAMMAD MEERAKHAN
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, ERNAKULAM
DATE OF JUDGMENT:
12/02/1969
BENCH:
RAMASWAMI, V.
BENCH:
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 were 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 abs-
tract 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
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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
JUDGMENT:
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
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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
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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 :
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"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
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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 that- the
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 tran-
saction 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
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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
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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 regulat-
ing 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
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relevant statutes."
In Commissioner of Income-tax, Madras v. A.
Krishnaswami Mudaliar and Ors. (2) it was
observed by this Court that which ever 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 cha-
racter 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.
Y.P. Appeal dismissed
669