1965 (3) TMI 104 - HC - Income Tax

Summary

Issues Involved:
1. Whether the surplus realizations of $5,150 and $7,038 on the sale of properties were revenue receipts assessable under the Indian Income-tax Act.
2. Whether the sums of Rs. 9,778 and Rs. 9,676 can be held to be interest receipts and as such part of the income of the assessee's headquarters' business.

Issue-wise Detailed Analysis:

1. Surplus Realizations on Sale of Properties:

The core question was whether the surplus realizations from the sale of properties were revenue receipts assessable under the Indian Income-tax Act. The assessee, in both cases, was involved in a dissolved partnership firm that dealt in money-lending and real estate. Upon dissolution, each assessee received a one-sixth share of the firm's assets, including lands, house properties, and rubber estates.

The properties in question were sold by the assessees, and the surplus amounts were realized. The Income-tax Officer treated these surpluses as revenue receipts. However, the Appellate Assistant Commissioner disagreed, noting that the properties were held as investments and not as stock-in-trade. He concluded that the excess realizations were not revenue receipts.

The Tribunal reversed this decision, stating that the properties were part of the stock-in-trade of a single business in Malaya, thus making the profits taxable. The High Court, however, ruled in favor of the assessees, emphasizing that the properties were held as capital assets post-dissolution and not as part of any trading activity. The court referenced several precedents, including the principle that mere realization of an investment at an enhanced price does not constitute a taxable profit unless it is part of a business activity. Therefore, the court concluded that the surplus realizations were not revenue receipts assessable to income-tax.

2. Interest Receipts from Headquarters' Business:

The second issue was whether the sums of Rs. 9,778 and Rs. 9,676 credited as interest in the profit and loss account were part of the income of the assessees' headquarters' business. The assessees argued that these entries were not actual income but mere notional entries made in expectation of future receipt of interest from branches.

The Tribunal held that the credit entries treated the branches as separate entities, making the interest part of the income. However, the High Court disagreed, stating that the entries were notional and did not represent actual income. The court highlighted that the interest was not realized and was merely an expectation. It emphasized that a man cannot trade with himself and make taxable profit out of such dealings. The court referenced the Supreme Court's decision in Indermani Jatia v. Commissioner of Income-tax, where the principle that no person can trade with himself was left open.

The court concluded that the interest entries were not income, as they were not realized and were only prospective. Therefore, the sums of Rs. 9,778 and Rs. 9,676 could not be considered part of the income of the assessees' headquarters' business.

Conclusion:

The High Court ruled in favor of the assessees on both issues. The surplus realizations from the sale of properties were not revenue receipts assessable to income-tax, and the interest sums were not part of the income of the assessees' headquarters' business.