1967 (3) TMI 3 - SC - Income Tax

Whether entire sums spent in carrying out the obligations subject to which lands were sold by the assessee were allowable in computing the assessee s profits from the land business - Whether the assessee was liable to be taxed only on the actual realisation of sales in cash subject to the allowances admissible under the IT Act - both the questions referred to the High Court have been rightly answered by it in favour of the assessee - revenue s appeal dismissed

Summary

Issues Involved:
1. Deductibility of expenditure incurred by the respondent-company for lands sold by the vendor-firm.
2. Taxation of unrealized sale consideration as income.

Detailed Analysis:

1. Deductibility of Expenditure:
Issue: Whether the entire sums of Rs. 1,12,577 and Rs. 3,43,155 for the assessment years 1950-51 and 1951-52 respectively, spent in carrying out the obligations subject to which lands were sold by the assessee, were allowable in computing the assessee's profits from the land business.

Judgment: The court rejected the argument that only the expenditure incurred in the relevant accounting year in connection with the lands sold by the respondent-company should be allowed, excluding the expenditure for lands sold by the vendor-firm. It was held that the respondent-company purchased a whole running business, including its liabilities, and the development of the land was an integrated process. The court emphasized that the development obligations undertaken by the respondent-company were necessary for the business and were not capital in nature but revenue expenditure. The principle of commercial expediency was applied, citing Eastern Investments Ltd. v. Commissioner of Income-tax and Cooke (H. M. Inspector of Taxes) v. Quick Shoe Repair Service. The court concluded that the expenses incurred for the development of lands sold by the vendor-firm were deductible under section 10(2)(xv) of the Income-tax Act.

2. Taxation of Unrealized Sale Consideration:
Issue: Whether the assessee was liable to be taxed only on the actual realization of sales in cash, subject to the allowances admissible under the Indian Income-tax Act.

Judgment: The court held that the full price recited in the sale deed should not be regarded as having been realized by the respondent-company for the relevant accounting years. It was noted that part of the consideration was paid in cash, and the balance was secured by a mortgage executed by the purchasers. The court rejected the argument that the amounts of consideration money not received in cash but secured by a mortgage should be treated as constructive receipt of the money. It was emphasized that giving security for the debt by the purchaser was not equivalent to payment. The court referred to Commissioner of Income-tax v. Maharajadhiraja of Darbhanga, where it was held that a promissory note given by a debtor is not equivalent to cash payment. Consequently, the unrealized consideration secured by mortgage could not be considered taxable income for the assessment periods in question.

Conclusion:
The High Court's answers to both questions were upheld, favoring the assessee. The expenditures incurred for the development of lands sold by the vendor-firm were deductible, and the unrealized sale consideration secured by mortgage was not taxable income for the relevant assessment years. The appeals were dismissed with costs.