1969 (2) TMI 4 - SC - Income Tax

Assessee purchasing the estate to re-sell it at a profit - 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. Having regard to the total effect of all these circumstances, 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 - Assessee's appeal dismissed

Issues Involved:
1. Whether the transactions constituted an adventure in the nature of trade.
2. Whether the surplus of Rs. 1,25,000 was assessable to tax.
3. Whether the profits from such an adventure were properly ascertained.

Issue-wise Detailed Analysis:

1. Whether the transactions constituted an adventure in the nature of trade:

The court emphasized that determining whether a transaction is an adventure in the nature of trade depends on the total impression and effect of all relevant facts and circumstances. The court cited various precedents, including *Californian Copper Syndicate v. Harris*, *Martin v. Lowry*, and *Rutledge v. Commissioners of Inland Revenue*, to illustrate that the nature of the transaction, the organization employed, and the intention behind the purchase and resale are critical factors.

In this case, the assessee purchased 447.71 acres of the Kuttikal Estate with the intention to resell it at a profit. The estate was divided into 23 plots, and 22 plots were sold to various purchasers, indicating scheming and organization. The court noted that the assessee did not have the resources to cultivate the land, further supporting the conclusion that the transaction was an adventure in the nature of trade. The High Court of Kerala's conclusion that the transactions constituted an adventure in the nature of trade was affirmed.

2. Whether the surplus of Rs. 1,25,000 was assessable to tax:

The Income-tax Officer included Rs. 1,25,000 as the assessee's profit from an adventure in the nature of trade under section 34(1)(a) of the Income-tax Act, 1922. The Appellate Assistant Commissioner and the Appellate Tribunal upheld this assessment. The High Court of Kerala also answered affirmatively, stating that the surplus was assessable to tax.

The Supreme Court agreed with the High Court, stating that the total effect of all circumstances indicated that the assessee's transactions were in the nature of trade, and thus, the surplus was rightly included in the total income for tax purposes.

3. Whether the profits from such an adventure were properly ascertained:

The appellant contended that the profits were not properly ascertained, arguing that the value of the 23rd plot retained by the assessee should not represent the profit made. The appellant suggested that the adventure would terminate only after the sale of the entire estate, and thus, profits could only be determined at that point.

The court rejected this argument, stating that under the Income-tax Act, each year is a self-contained unit, and profits must be computed based on the statute. The court cited *Whimster & Co. v. Commissioners of Inland Revenue* and *Commissioners of Inland Revenue v. Cock, Russell & Co. Ltd.*, emphasizing that the valuation of stock-in-trade at the beginning and end of the accounting year is essential for accurate profit assessment. The court concluded that the income-tax authorities correctly estimated the profit by treating the land as stock-in-trade and valuing it according to normal accountancy practice.

Conclusion:

The Supreme Court upheld the High Court of Kerala's decision, confirming that the transactions constituted an adventure in the nature of trade, the surplus of Rs. 1,25,000 was assessable to tax, and the profits were properly ascertained. The appeal was dismissed with costs.

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