1970 (11) TMI 106 - HC - Income Tax

Summary

Issues Involved:
1. Whether the appellant's profit from the sale of land was assessable as income under section 26(a) of the Income Tax Assessment Act, 1936-1963.
2. Whether the profit constituted income according to ordinary concepts, as an adventure in the nature of trade.

Detailed Analysis:

1. Assessability of Profit under Section 26(a) of the Income Tax Assessment Act, 1936-1963

Background and Facts:
The appellant, along with her brother, inherited land under their uncle's will. The appellant wished to retain the land, while her brother wanted to sell. She purchased her brother's share by selling part of the land and retained the rest. The respondent assessed her to income tax on the profit made from the sale.

Arguments and Judgment:
- Initial Judgment by Windeyer J.: The appellant's acquisition of the land was not for the purpose of profit-making by sale. She inherited an undivided half-share and purchased the other half-share to retain the land. The sale was a mere realization of a capital asset.
- Full Court Appeal: Barwick C.J. dissented, agreeing with Windeyer J. that the realization of an inheritance, even if systematic and businesslike, does not constitute profit or income. Kitto J., supported by Menzies and Owen JJ., held that the profit was assessable under the second limb of section 26(a) and constituted income as an adventure in the nature of trade.
- Privy Council's View: The appellant did not acquire the property for profit-making by sale. The acquisition was through the bounty of the testator, and the sale was to avoid becoming a tenant-in-common with a stranger, not a profit-making scheme.

Key Points:
- The appellant's primary purpose was to retain the land, not to sell it for profit.
- The sale of part of the land was a means to an end (retaining the more valuable portions), not a profit-making scheme.
- The transaction did not exhibit features of a business deal required to fall under section 26(a).

2. Profit as Income According to Ordinary Concepts

Background and Facts:
The respondent argued that the profit made by the appellant was income according to ordinary concepts, as she engaged in an adventure in the nature of trade.

Arguments and Judgment:
- Windeyer J.: The appellant's actions were a mere realization of a capital asset, not an adventure in the nature of trade.
- Kitto J.: The appellant's purchase of her brother's share and subsequent sale constituted a profit-making scheme, thus the profit was income.
- Privy Council's View: The facts did not reveal an adventure in the nature of trade. The appellant's actions were aimed at retaining the land, and the sale was incidental.

Key Points:
- The appellant's intention was to retain the land, not to engage in trade.
- The sale of part of the land was a necessary step to achieve her primary goal.
- The profit from the sale was not income according to ordinary concepts but a capital gain.

Conclusion:
The Privy Council concluded that the appellant's profit from the sale of the land was not assessable as income under section 26(a) of the Income Tax Assessment Act, 1936-1963, nor was it income according to ordinary concepts. The appeal was allowed, and the respondent was ordered to pay the costs.

Dissenting Judgment:
LORD PEARSON (with LORD MACDERMOTT concurring):
- Held that section 26(a) applied to the case.
- The appellant acquired the land for the purpose of profit-making by sale.
- The transaction went beyond mere realization and was a profit-making scheme.

Final Decision:
The appeal was allowed, and the respondent was ordered to pay the costs.