1978 (7) TMI 39 - HC - Income Tax

Adventure In The Nature Of Trade, Business Income, Dealing In Land, Income Tax Act, Revenue Receipt, Setting Up

Issues Involved:
1. Whether the transactions in question were on capital account or constituted an adventure in the nature of trade.
2. If the answer to the above question is against the applicants, whether the excess of the agreed price over the cost has properly been brought to tax for the assessment years 1949-50, 1950-51, and 1952-53.

Detailed Analysis:

Issue 1: Nature of Transactions - Capital Account vs. Adventure in the Nature of Trade

The court examined whether the transactions in question were on capital account or constituted an adventure in the nature of trade. The assessee, Estate Investment Company Ltd., was incorporated with the object to enter into transactions relating to land and properties. The company purchased several villages, including lands at Chincholi and Dindoshi Villages, and claimed that these lands were intended for a model dairy, settlement, and engineering college for middle-class people. However, the Income Tax Officer (ITO) concluded that the assessee-company purchased, developed, and regularly sold lands for profit, constituting business transactions.

The Tribunal and the taxing authorities viewed the sales as adventures in the nature of trade, considering the company's primary object of dealing in lands. The court noted that the assessee-company's activities were consistent with its object clause, which included acquiring and dealing in lands. The court cited several precedents, including the Californian Copper Syndicate case, to establish that if a transaction is in the assessee's ordinary line of business, it is in the nature of trade. The court emphasized that the intention at the inception of the purchase is crucial and that the company's primary object was to deal in lands.

The court rejected the assessee's contention that the sales were merely realizations of investments, noting that the company had not undertaken any substantial activity other than the sale of lands. The balance-sheet and profit and loss account indicated that the profits from land sales were treated as revenue receipts. The court concluded that the transactions constituted adventures in the nature of trade.

Issue 2: Proper Taxation of Excess Amounts

The second issue was whether the excess of the agreed price over the cost was properly brought to tax for the assessment years 1949-50, 1950-51, and 1952-53. The assessee argued that the sales were not complete as the sale deeds were not executed and registered, and hence no profits were made. The ITO, however, observed that the assessee treated these transactions as complete sales in their account books and transferred the profits to the reserve fund.

The Tribunal upheld the ITO's view, stating that the commercial profits were earned when the lands were given into the possession of the buyers, either on actual receipt of consideration or on the promise of consideration. The Tribunal noted that the assessee was not concerned with when the title to the land passed to the buyer but with whether profits were made on the date of receipt of consideration and delivery of the property.

The court agreed with the Tribunal's view, emphasizing that the profits accrued to the assessee in the year in which the price was received or regarded as received, as indicated by the entries in the account books. The court rejected the assessee's contention that profits could only be regarded as accrued when the conveyance was executed. The court held that the profits were properly brought to tax in the respective assessment years.

Conclusion

1. The transactions in question constituted adventures in the nature of trade.
2. The excess of the agreed price over the cost was properly brought to tax for the assessment years 1949-50, 1950-51, and 1952-53.

The assessee was ordered to pay the costs of the revenue.

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